G20 summit masks US-EU tensions on economic recovery

The G8 and G20 summits may have seemed a damp squib, but the final communiqué, always drafted so that everybody can go away saying that they’ve won, only masks the fundamentally different approaches to economic policy by the US and by European countries.

The G8 and G20 summits may have seemed a damp squib, but the final communiqué, always drafted so that everybody can go away saying that they’ve won, only masks the fundamentally different approaches to economic policy by the US and by European countries.

Communiqués mean different things to different people. When President Obama welcomes the commitment to halving budget deficits by 2013 and says that “we can’t all rush to the exits at the same time”, he is saying ‘don’t remove stimulus measures too quickly’. For George Osborne, Wolfgang Schaeuble and others it means ‘slash and burn’.

Some countries, like Greece, Spain, Portugal and Italy do have to make deep cuts and structural labour market reforms if they are to avoid economic meltdown, but these are exceptional cases; Germany, France and Britain are not facing such dire problems, yet have chosen to swallow the same medicine as their Mediterranean counterparts.

This is entirely unnecessary – the average budget deficit in the Eurozone is 6 per cent – far from ideal – but hardly as apocalyptic as the credit rating agencies would have you believe. It is a fine balancing act, when to invest to make up for weak private demand and when to consolidate to balance the books – but Europe is in grave danger of becoming to this decade what Japan was to the 1990s.

During the 1970s and 1980s, Japan was seen by eminent economists, most notably Paul Kennedy, as the new world economic powerhouse that would soon overtake the US. Yet, recession followed by too little stimulus – withdrawn too early – led to more than a decade of anaemic growth and, even now,  a debt to GDP ratio of around 200 per cent – more than treble that of Britain.

Yet every country in Europe is taking the approach that public spending cuts and higher taxes will lead to more controlled consumer spending and a smaller public sector, while investment and exports will be the main drivers of growth.

US Treasury Secretary Tim Geithner was candid that the US, which, at a predicted 3.1 per cent for 2010, has much stronger growth than the eurozone but an 11 per cent budget deficit like Britain, is not in a position to pick up the slack. European countries will not be able to rely on the US to buy their goods. At the same time, through simultaneous moves to economic consolidation and to weaken consumption, they are killing stone dead demand for exports within the eurozone.

The bottom line is that steady growth is needed in order for budgets to be balanced, and the idea that premature cuts will deliver sustainable public finances is a fallacy; failing to recognise that a collective rush to austerity will lead to higher deficits, higher unemployment and stagnant output will haunt Europe’s leaders.

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